At the Close: Stocks Drop as S&P 500′s Winning Streak Ends

By Ben Levisohn

The S&P 500 dropped 0.3% to 1,683.42 today, putting a halt to its seven-day winning streak, while the Dow Jones Industrials fell 0.2% to 15,300.64. The Nasdaq Composite declined 0.2% to 3,715.97.

The stock market was doing pretty well today until, even rising briefly, until falling. One possible reason: Back and forth on Syria, which indicated that the Russian plan won’t be as easy to implement as many hoped. For instance, Syrian President Bashar al-Assad has demanded that the U.S.stop sending arms to the rebels and ends its threats before he’ll give up his chemical weapons.

President Obama’s September 10 speech explained why a potential U.S. strike on Syria would be limited, but the president’s point is obscured by the tactical U.S. switch to negotiating a Russian proposal to send U.N. inspectors and technicians into Syria to secure the chemical weapons caches. In fact, the Senate has shelved a resolution on a military intervention in Syria, in order to allow President Obama to pursue diplomacy with Russia. We believe the Russian proposal is not feasible, but that the U.S. pause to engage Moscow diplomatically demonstrates hesitation to strike Syria militarily. We therefore think that long-term investors should focus on our constructive outlook for the remainder of this year and beyond.

Syria always was a short-term problem, and will likely continue to be. Of more concern: Next week’s FOMC meeting. Yes, tapering is likely to happen. And yes, most investors know that’s the case. What worries me is not the short-term reaction but the potential for longer-term problems to occur because many investors are convinced that U.S. economy has healed. If that were the case, however, nominal GDP, that is growth plus inflation, would be higher than the current 3.1%, as cited in Deutsche Bank’sLong-Term Asset Return Study, which was released today. Jim Reid, Nick Burns and Seb Barker write:

If we had a nominal GDP target we may now be discussing increasing QE and not tapering.

Expanding ‘traditional’ QE might not be the answer. We think that more debate is needed on policies that directly target nominal GDP and not just asset prices. Perhaps the groundwork is currently being laid for this by the blurring of lines between governments and central banks. In Japan ‘Abenomics’ is fostering a deeper partnership between the two. In the UK, the government specifically headhunted new BoE Governor Mark Carney and altered the BoE’s remit, and in the US President Obama is about to hand-pick Bernanke’s successor. The ECB is institutionally an outlier but even Draghi has stepped beyond his inflation remit with his ‘whatever it takes’ speech last summer. Globally the next few years may bring politicians and central bankers closer together and monetary policy that directly targets growth over financial assets.

As for U.S. stocks, QE has pushed valuations to a level that indicates an estimated annualized return of 3.24% a year for the next 10-years, Reid, Burns and Barker say.

Sure their view is an outlier today, but that just means we should probably pay attention to it.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.